AirTran Holdings Inc. Q1 2008 Earnings Call Transcript

AirTran Holdings Inc.

Q1 2008 Earnings Call

April 22, 2008 9:00 am ET

Executives

Arne Haak - Vice President of Finance and Treasurer

Kevin Healy - Senior Vice President of Marketing and Planning

Bob Fornaro - Chief Executive Officer

Analysts

Mike Linenberg - Merrill Lynch

Jim Parker - Raymond James

Frank Boroch - Bear Stearns

Gary Chase - Lehman Brothers

Ray Neidl – Calyon

Jamie Baker – JP Morgan

Dan McKenzie - Credit Suisse

Bob McAdoo - Avondale Partners

Kevin Crissey - UBS

Presentation

Operator

I would like to welcome everyone to the AirTran Holdings Inc. conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Arne Haak. Sir, you may begin your conference.

Arne Haak

Good morning, everyone. I’d like to thank you for joining us for a discussion of our first quarter results and our outlook for the remainder of the year. Joining me today is Kevin Healy, our Senior Vice President of Marketing and Planning; and Bob Fornaro, our Chief Executive Officer.

I’d like to remind you that this call will contain forward-looking statements. These comments are not historical facts and instead you should consider them as time sensitive forward-looking statements that are accurate only as of April 22, 2008.

If you would like additional information concerning factors that could cause our actual results to vary from those in our forward-looking statements, they can be found in our Form 10-K and other SEC filings on the company.

We will also be discussing several non-GAAP financial measures that we believe are more consistent with our true operating performance and provide a more meaningful period-to-period comparison as they exclude special items.

A copy of today’s press release, our SEC filings, and a reconciliation of these non-GAAP financial measures is available in the investor relations section of the company’s website at AirTran.com. Today we will be discussing our first quarter results; discussing our outlook for the second quarter; as well as outlining our initiatives for adapting to a high oil price world. At the end of the call, we will open up the floor for a brief question-and-answer session.

Before we get started, I’d like to thank the over 8,500 crew members of AirTran Airways for all of their hard work in this very challenging environment. Over the past four years, they have been critical in the success of our company and in delivering operational excellence and great customer service.

These accomplishments have been recognized during the airline quality rating which is issued by the Wichita State University and the University of Nebraska at Omaha. From 2004 to 2006 AirTran consistently ranked number 2 in quality and in 2007 we received the top ranking for quality among major airlines. We are all proud that we have built an airline that can deliver a winning combination of high quality service, operational excellence and an industry-leading cost structure.

I’d now like to discuss our first quarter results. For the first quarter, AirTran Holdings reported a net loss of $34.8 million or a loss of $0.38 per share. These results included a $5.2 million charge or $0.04 net of tax per share related to the unrealized loss on derivatives financial instruments. Excluding these charges, we reported a net loss of $31.6 million or a loss of $0.34 per share.

Despite the challenges of the current economic environment we delivered solid revenue results. Year over year we added nine aircraft which resulted in capacity growth of 10.8% as measured by available seat mile. Passenger demand as measured by revenue passenger miles grew by 19.2% which resulted in a record first quarter load factor of 75.3%. Our average passenger yield declined by 0.7% during the first quarter. This was driven by an increase in passenger length of haul which rose 5.9% to just over 760 miles. As a result, passenger revenues increased 18.4% to $566.4 million.

Other operating revenues increased 21.7% to $30 million. Total revenues increased by $92.3 million and our total unit revenue during the first quarter increased 6.7%. This was in line with our guidance of up 6% to 7% at the start of the quarter and actually slightly ahead of our most recent guidance of up 6% to 6.5%. The quarter was aided by the shift of Easter from April to March which produced better than anticipated revenues at the end of March, and also by better than expected other revenues driven by our ancillary revenue initiatives.

Our total operating costs during the first quarter increased by $140.5 million or 28.6%. This results in a 16% increase in operating cost per ASM. Of this increase, $102.4 million or over 72% of this increase was due to higher fuel expense. The price of fuel rose from $2.01 per gallon in the first quarter of 2007 to $3 per gallon in the first quarter of 2008. Fuel prices have risen rapidly through the entire first quarter and fuel now represents nearly 43% of our total operating expenses.

During the quarter, we hedged over 40% of our fuel at an all-in price of $2.89 per gallon which resulted in savings of $4 million.

Operator, if I could, I believe someone’s mic is open with a keyboard typing so if you could please turn off their mic I would appreciate that.

Our non-fuel operating expenses increased by 11.7% to $363.2 million resulting in a non-fuel operating cost per ASM of $6.29 which was up 0.8% year over year. This was slightly higher than our initial quarterly guidance of up 0.5% as a result of two material items.

During the first quarter, we received a surprise assessment from the Baltimore/Washington International Thurgood Marshall Airport for over $2 million. This assessment was related to a cost recovery effort by the airport to pass on back rents and fees to offset budget shortfalls to all airlines over the last several years. We are currently in negotiations with the airport on this matter.

De-icing expense during the first quarter was significantly higher as well as a result of increased winter weather. Our de-icing expense during the first quarter was nearly $81 per departure. The previous record cost per departure was set last year and was $66 per departure. The average de-icing cost per departure over the previous four years was approximately $53 per departure.

Absent the airport charge in Baltimore and the effects of the increased rate of de-icing, our non-fuel unit costs would have been flat year over year, slightly better than our previous guidance.

Our total cash investments at the end of the quarter was $386.3 million of which $28.4 million was restricted. This was up from $355.8 million at the end of the year. Interest income in the quarter was down 64.2% year over year to $1.8 million. This is due to lower interest rates on investments and the change in the unrealized decline in net asset value on our investment in the Columbia Management Strategic Cash Portfolio Fund. Our exposure to this fund, which we outlined in our 10-K, has declined from $80 million at the end of the year to $52 million at the end of the first quarter as a result of the receipt of scheduled disbursements. Over 90% part of our remaining cash balance is invested in Treasury securities. We have no direct exposure to auction rate securities as we successfully eliminated these investments from our portfolio during the fourth quarter and the first week of January.

There’s been a lot of speculation in the last several weeks as well over agreements with the organizations that process our credit card transactions. I’d like to spend a few moments reviewing our current agreements to help set the record straight.

We have competitive agreements with all of our primary credit card processors. These are relationships that have been in place for over 12 years and we are in full compliance with all of our agreements. None of our current agreements with our primary processors contain financial covenants that we must meet to maintain our zero percent holdback on future sales. They do contain a material adverse change clause which is standard in these contracts and applies to all airlines. These contracts also preclude us from disclosing the specific commercial terms of our agreement.

I’d now like to spend a few minutes talking about our outlook and future plans for the company. Demand for our product remains strong as evidenced by our 19% growth in RPMs and a 5.2 point improvement in load factor. We are currently expecting that April unit revenues will be flat to down slightly as a result of the shift in the Easter period.

Advance booked revenue for the remainder of the second quarter and the summer is up significantly year over year and we expect unit revenues to be up 5% to 6% in the second quarter.

We continue to work to hedge our fuel exposure with a portfolio of swaps and various types of collars against both crude oil and jet fuel. With an underlying assumption of a $104 of crude oil and $23 crack spread we expect our second quarter fuel price per gallon to be between $3.20 and $3.25 per gallon all-in, net of the effect of our hedging contracts. We have hedged approximately 50% of our fuel for the remainder of the year and over 20% of our current consumption for 2009.

With the same underlying assumptions for the second quarter, 48% of our current needs have been hedged at a price of $3.05 to $3.10 per gallon. In the third quarter, 51% of our current needs had been hedged at a price that is currently valued between $2.85 to $2.90 per gallon. In the fourth quarter, 48% of our current needs have been hedged at a price that is currently valued at between $2.85 to $2.90 per gallon. In 2009, over 20% of our current needs have been hedged at a price that is currently valued between $2.85 and $2.90 per gallon.

As we highlighted earlier, fuel now represents nearly 43% of our total costs and its pricing has become extremely volatile. In the last six months we have seen the price of oil rise from $80 a barrel at the end of September to $96 a barrel by the end of 2007, to nearly $117 a barrel as of last Friday. Even last year with oil around $70 a barrel, many legacy airlines and several smaller carriers had struggled to produce viable domestic margins. This implies that with oil prices well above $100 a barrel, domestic capacity will be significantly reduced.

Legacy airlines continue to shrink their domestic operations and are increasingly turning towards international flights which are currently being supported by stronger overseas currencies. Others who have struggle for years to adapt have already failed. There should be no debate that there is a need for reliable, affordable, low cost air transportation in the United States. Yet there are very few airlines that have been able to build successful, profitable domestic airline networks in the United State, which is the world’s largest travel market.

AirTran has been one of the most U.S. successful airlines the past nine years because of our low cost discipline and our ability to respond quickly to both change and to opportunity. AirTran’s business model is sound and it is built on a foundation of industry-leading low non-fuel costs, a young fuel efficient fleet of modern aircraft, a high quality product, a diversified network, a nimble management philosophy, and is supported by a team of smart, disciplined and motivated crew members.

We do spend a lot of time talking about non-fuel CASM but even with the advantages of low costs, new aircraft and industry-leading quality, we are not immune to the challenges that face our entire industry. Adapting to high energy prices is a challenge faced by all airlines. It will also create opportunities for those who successfully adapt.

There are two solutions for our industry to today’s high energy prices. Either the prices our customers pay will increase to accurately reflect the cost of energy or the price of oil will abate. We have been working for the past several months in identifying how AirTran should adapt to these challenging times. Today I would like to share with you the framework of our plans and over the coming months we will provide additional details and updates on our execution of these plans.

While several airlines have announced modest adjustments to their capacity, we strongly believe that more industry capacity needs to be removed. Our current fleet plan, which was developed in late 2006 at a time when oil prices were at $60 a barrel and many had expectations of continued oil price reductions. We adjusted our growth rate down to 10% per year from our previous plans to grow 20% a year. At a time when it would have been easy to be optimistic about the first significant reduction in oil prices in years, we took at disciplined approach that resulted in a business plan that could produce significant profits at oil prices well into the $80 and $90 per barrel. The benefits of this plan began to show in 2007 and we had high expectation for 2008.

Oil price volatility has become especially severe in the past three months. The price of oil has ranged from the 80s in early February and has risen to more than $115 a barrel in recent days. It has become commonplace to see the price of oil move $6 to $10 a week. This volatility has greatly increased the risks and the potential rewards for the U.S. airline industry.

As we have done in the past, we are moving quickly and aggressively to adapt to this change and properly position our company to once again benefit from the inevitable opportunities to resume the growth of our business.

Our plan is quite simple: given the seasonality of our business, we believe we will be profitable at current fuel prices during the spring through summer travel period. However, with the run-up in fuel prices there is no economic merit in continuing to grow our business and we are executing a plan that will result in a suspension of our growth plans beginning in September 2008 and continuing at least through 2009.

Our capacity guidance for the remainder of the year and 2009 is as follows: we will continue to increase our ASMs in the second quarter by 10% to 12% and by 9% to 10% in the July through August period. Our growth rate for the September through December of 2008 period will be flat year over year, as will our growth rate for all of 2009. This represents a 10% reduction in our capacity plans for the fourth quarter and a 10% reduction in capacity for 2009.

The impact on our fleet planned is as follows. We began the year with a fleet of 137 aircraft comprised of 87 717s and 50 737-700s with a plan to grow to 147 aircraft. We are now planning on ending 2008 with a fleet of 141 aircraft, down six aircraft from our previous estimates.

We had planned to grow our fleet by an additional 14 aircraft in 2009. Our revised fleet plan calls for ending 2009 with 141 aircraft. We are working on multiple fronts to not only reduce our fleet but potentially do so in a way that will monetize a portion of the value of our fleet and adjust our future order book.

We have already reached signed agreements to sell four aircraft in 2008 and expect to shortly complete an agreement for the sale of an additional two aircraft. The sale of these four aircraft will improve our planned cash flow by over $40 million through the cash gain on the sale and the avoidance of equity investments in the aircraft. It will also eliminate the need to issue over $120 million in additional aircraft debt.

This reduction in growth will also allow us to cut our non-aircraft CapEx plans for the year in half, from $25 million to $30 million to $12 million to $18 million. We have also been aggressively reviewing our planned operating costs. We now expect non-fuel operating unit costs to be down 1% to 1.5% year over year in the second quarter and down 2.5% to 3% in the third quarter.

Given our solid cost performance in the first quarter and our current outlook for the second and third quarters, you can see that the cost discipline at AirTran remains robust.

We’ve also announced two efforts today to raise capital: a $65 million equity offering as well as a joint $65 million convertible debt offering. When combined with a potential 15% greenshoe we are looking to raise an additional $150 million in capital. It is clear to us that our previous decisions to invest in growth and to invest in new airplanes has proven to be too aggressive for an oil environment that very few could have imagined just six months ago.

We are also prepared to reduce our growth even further if economic conditions in the U.S. worsen. We are uniquely positioned with low costs and a young fleet. The timing of our aircraft order and the prices of our aircraft gives us great confidence that we have the flexibility to execute on our plans, to manage our levels of capacity and further improve our liquidity, should it be necessary.

In addition, with very low non-fuel costs and high current fuel prices, our variable costs are now approaching 65%. This gives us a tremendous amount of flexibility to manage our capacity during off-peak revenue months.

Legacy consolidation has also recently begun with the announced plan to merge two of our largest competitors in Delta and Northwest Airlines. Legacy airline consolidation and the corresponding elimination of inefficient and redundant domestic capacity is long overdue. We view this as being a positive for the industry and a strong positive for AirTran as domestic capacity will come down and our low-cost advantage will continue to widen.

In summary, AirTran has a solid business model and the right strategy for today’s domestic air travel marketplace. We have extremely low costs, high quality, a diversified network and the demonstrated discipline and experience to manage adversity and emerge as a stronger, more viable airline as we have done in the past.

I would like to turn the call over for questions.

Question-and-Answer Session

Operator

Our first question comes from Mike Linenberg - Merrill Lynch.

Mike Linenberg - Merrill Lynch

A couple questions here, Arne. The aircraft sales, I think it was four that you’ve signed and two planned. Are those all 737-700s, are they outright sales or are some sale-leasebacks so you’re going to hold on to some of the airplanes?

And then the possibility for selling 717s, is that in the cards, does that make sense especially with the run up in fuel?

Arne Haak

A very good question, Mike. The sales that we have announced are all 737-700s. We have had discussions with people and they are ongoing. There is a very high demand for people to buy the aircraft as well as for lenders to do sale-leaseback for some of the airplanes we own today.

There is interest in the 717 and there can be certain scenarios where it might make sense but we are pleased with that aircraft and what it does for us. I think we are most confident in what we can execute on the 737 side. There are still people who are asking about 717s and that door remains open. But I think most of our efforts are likely to remain with 737s.

Mike Linenberg - Merrill Lynch

My second question with the pullback in capacity growth going to flat, there’s a lot of stuff that you’re adding this summer. It seems like you are adding a lot of service out of Milwaukee, you’re doing some of the long haul out of Baltimore to L.A. and Seattle. Some of that longer haul stuff probably doesn’t make as much sense given where fuel prices are. Is that stuff seasonal? Does that stuff go away? Where we should look for cuts and pullback as we get into the fall?

Kevin Healy

Mike, this is Kevin Healy. When we announced the services that you mentioned they were seasonal so generally speaking, they are going out anyway and then some other point-to-point will come down as well over the next couple of weeks.

Bob Fornaro

Again, those are largely east-west routes which typically peak from June through early September so that was our plan early on and they will again see seasonal reductions there.

Mike Linenberg - Merrill Lynch

I know Arne made the statement that based on current fuel prices given where demand is you thought that you could be profitable through the spring and summer. When we talk about current fuel prices, he did throw out some fuel prices that you were currently using. Presumably those are the numbers at which you could be profitable? I think it was a crack spread in the low 20s.

Kevin Healy

Even higher -- I think I know where you’re going with your question here. Even higher than that, obviously. What we see so far in the summer looks very good and as we look at the whole period in combination I think we are very pleased with what we see on the revenue environment and the number is probably a good bit higher.

That being said, going forward the profitability is still sub par compared to the typical profitability we have in this time of the year.

Operator

Your next question comes from Jim Parker - Raymond James.

Jim Parker - Raymond James

At what oil price, crack spread level do you burn cash? Just from operations, ex your aircraft sales and so forth. At what oil price crack spread do you actually burn cash?

Kevin Healy

Well, Jim it’s actually a higher number that I think any of us thought it would have been if you had asked us back in September or December of last year. We think that the business is modestly profitable into probably the low 100s, around $100 a barrel, low 100s right now. A lot of that depends on the revenue environment and our assumptions and what happens with capacity in the marketplace.

But really, what we think we are doing here today, this combination of activities, if you look at what we’ve done we’ve aggressively managed our fuel hedge portfolio. I think we’ve done a very good job in structuring what we have done to give us protection with a 50% hedge. We are slowing our growth. We are cutting our own internal CapEx. We are making this problem a much more manageable problem for all of us to manage. This, combined with the capital market raise, we believe gives us the position where we can focus on the most important issue which is adapting our business which we are confident we can do. It allows us to focus on that and instead of chasing what is the latest economic issue, what is the latest credit issue, what is the latest fuel issue?

We have positioned the company now so that we can focus on transitioning this business to being successful in a high oil world.

Robert Fornaro

I think we want to break the industry into a couple of phases. Right now we are in a seasonally strong revenue period and as we enter the fall, obviously, we see this shoulder period, the seasonal weakness. If you look at what we’ve seen, just about every carrier that’s done an earnings call has announced in the fourth quarter a 4% or 5% increase in capacity. That includes Southwest last week, Continental and American. I believe you’ll hear other calls today on the three earnings calls.

If oil prices remain at the same levels, I would guarantee you when we do our earnings calls in July you’ll see more reductions in capacity. At that point we’re going to see significant improvement in the unit revenues going forward. You just can’t project out a situation where a world stays at high oil prices and nothing else happens. This is creating a situation where all carriers are going to react and what’s going to happen is we are going to change the revenue environment. We’ll push up average fares as redundant capacity leaves.

So it’s a situation we see today. If we see high oil prices we will be looking at a different scenario from most carriers just three months from now.

Jim Parker - Raymond James

Bob, also it appears that United has tried to raise the fuel surcharge but that AirTran is not going along with the entirety. I don’t know, maybe it was $20. But you talk about demand being strong for the summer season but on the other hand, perhaps surcharges are not holding. Can you update us on that?

Robert Fornaro

The strongest comp correlation at the end of the day is capacity and pricing. Just raising prices without reductions in capacity is not going to raise the average fare. In order to support the price increases the capacity has to drop. There is some customer segment that’s elastic, but a large portion of the customer base is inelastic, especially with leisure travel. So you just can’t be adding increases on top of increases.

The only certain way to get the average prices up is to accompany it with capacity adjustments. Those two things have to occur simultaneously. I think you’ll see in the second quarter, in the third quarter, you will see our average fares go up. We have a surcharge, we take a number of fare increases. You don’t adapt from $70 oil basically six months ago to $115 oil in three or four months. It takes a little time and it’s a combination of efforts.

So I think in terms of price increases we’re comfortable that we’ve taken a number of increases. We’ve increased our ancillary revenues in a number of areas and we have a surcharge as well. So I think there is plenty of room with the fare structure right now. The issue is ultimately trying to raise the mix, trying to move customers from lower-paying fares to higher-paying fares. But there’s plenty of room in the fare structure right now; it’s just a matter of trying to sell those customers to higher ticket prices.

Operator

Your next question comes from Frank Boroch - Bear Stearns.

Frank Boroch - Bear Stearns

Have you talked with the pilots about the change in the capacity plan and the impact with that on negotiations?

Robert Fornaro

Well, Frank, we have not had conversations about this level of reduction. I think our pilots are aware of what we were looking at before. I think back about five weeks ago we were looking at a lower reduction in capacity, but it was just two weeks ago that the oil prices had pushed below $99; this is very, very volatile. At some point you have to stop and say when do you make your long-term decisions? So this is a very, very volatile situation. I think that we’ll be talking about the situation with our pilots and everybody at AirTran Airways because everybody has an interest in what we are doing to successfully manage in these times.

But right now regarding negotiations with our pilots, at this point we are not in negotiations yet. I think you may be aware we have a mediator. Our pilots are in the process of assembling a negotiating team. I suspect at some point perhaps this quarter or next we will begin to have conversations, but right now there is not active negotiation.

Frank Boroch - Bear Stearns

Lastly, could you remind us are there any covenants in any of your fixed income securities that limit your M&A flexibility?

Kevin Healy

No Frank, there is not. Obviously what we did with Midwest Airlines, we’ve been through a lot of that. And in terms of if it came from the other side, I think that the acquiring firm would have to honor our obligations.

Operator

Our next question comes from Gary Chase - Lehman Brothers.

Gary Chase - Lehman Brothers

Kevin, could you help us through how RASM progressed through the quarter, what the impact of the early Easter was?

Kevin Healy

Sure, Gary. The unit revenue in March actually was very strong. January was good. February was off a little bit due to some industry pricing but overall got much stronger as we came into March and then closed stronger at the end of March than we had originally anticipated.

Gary Chase - Lehman Brothers

In terms of the strength in March was that principally in the Florida market for what you would expect in the spring break markets or was that something you saw across the board?

Kevin Healy

Generally, Florida is very strong; the early Easter helped that but I think in the strong flows most markets performed well, certainly Atlanta and Florida.

Robert Fornaro

You have to obviously consider the fact that certainly some revenue that would have flown in April did move into March because of the early Easter. So I don’t think our situation at AirTran is any different than what some of the other airlines have announced as well.

Kevin Healy

As we look at March and April combined and look back versus January and February the combined period is stronger and the outlook for May through the summer looks quite good this point as well. Obviously it’s limited visibility, but what we see we like very much.

Gary Chase - Lehman Brothers

I appreciate that. A quick question on the network. In term of slowing the growth, do you see opportunities in the network to reallocate out of existing markets but continue to expand in some places where voids might be created from consolidation? Do you think it is just simply taking up some of the market development, is that what you’re after?

Robert Fornaro

Again, if we look at really what we’re doing is as oil prices have increased over time market development has taken longer and longer. So I think, again, by slowing the growth, you are reducing market development, so I think that’s important. But also as part of this I think there needs to be a redistribution of the capacity as well. There are routes, for example, that we might have got into in a $50 or $60 environment that don’t hold up at $100. Some of the things that we’re doing we’re going to have to stop.

So as the industry enters consolidation, we do have some flexibility to optimize our fleets even though the growth is slowing and we have fewer airplanes. I think there’s certainly room to re-optimize the network and to take advantage of some of the adjustments that are going to go on in the industry.

I think the one positive is certainly as the capacity drops the traffic and the revenue will redistribute itself via certain hubs. I think, again in our portfolio, clearly we have a lot of strength in Florida, we have very strong operation in Atlanta, we have the largest low-cost hub in the world and a very strong operation in Baltimore. Those are our key strengths which we’re going to continue to build around.

I think our efforts to diversify with these high prices will slow. Certainly down the road we’ll be able to redistribute some of our airplanes and grow two or three years down the road. I think there’s adequate flexibility to take advantage of any consolidation efforts that we’re going to see in the next couple of months.

Operator

Our next question comes from Ray Neidl - Calyon.

Ray Neidl - Calyon

One thing, I can see you cutting growth or taking growth out altogether with the current fuel prices. But on the other hand, in the past you said you had to have some growth in your system because you were a small airline and you need a certain market mass. What effect is that going to have on your future plans? Are you going to have enough market mass?

Robert Fornaro

I think we have to take things really in perspective, Ray. I think if I look back over my own tenure at AirTran we’ve been through a lot. In 1999 I think our company had $5 million or $10 million of free cash and the oldest fleet in the United States and we began to put a turnaround in place. We didn’t grow at all in 1999 because we wanted to have a foundation in place. So that was our approach eight or nine years ago.

After 9/11 we took action and reduced our capacity early and didn’t grow for a period of six to eight months while we repositioned our company. I think we were one of the few airlines that came out of 9/11 substantially stronger. While a number of these airlines were going to the ATSB for loans or filing bankruptcy, again, AirTran continued to be profitable every single year.

So when we look at the situation in front of us we have to look at this as the priority needs to be adapting to higher fuel prices. Once we adapt, we can continue on our path to diversifying the company. But we have to set our priorities, we have to simplify the things that we’re working on, and right now our goal is we are going to adapt and we are going to adapt faster than every one of our competitors.

We’ve taken this seriously and our feeling is we would rather be out in front of the changes rather than be in the back of the line. So we are simply resetting our priorities to be highly profitable in a high energy environment.

Ray Neidl - Calyon

You’re keeping your flexibility open, I take it, because if consolidation does occur on a major scale other assets that you might want to pick up, such as maybe US Air assets in Washington DC?

Robert Fornaro

Well, a good question. Certainly we are actually on record even with the Department of Transportation, certainly, that we are in favor of consolidation. Quite frankly, we think consolidation will benefit all the players, especially in the domestic markets.

The only caveat to our support of consolidation is we want the ability to compete. So that could mean perhaps additional gates in Atlanta and certainly ability to grow in Washington National, LaGuardia and Chicago O’Hare.

I think what’s very, very important to compete in the U.S. market is you have to have access to the key cities. I mean, that’s how you build a reputation with your business travelers by going to the important places. So I think we are going to have that opportunity. I believe there’s going to be more capacity coming out of the marketplace than perhaps the potential companies we’re talking about.

Ray Neidl - Calyon

Finally, Bob with the recent action of Frontier Airlines in Chapter 11, does that have any effect on your partnership there?

Robert Fornaro

So far, I think as we probably stated in the past, that relationship is probably worth for us $5 million in 2007. I think so far it is continuing and again it’s a very, very small step in our revenue base and everything tells me that will continue with no changes.

Operator

Your next question comes from Jamie Baker – JP Morgan.

Jamie Baker – JP Morgan

A question on ex-fuel CASM trends. You’ve just improved your guidance for the couple of quarters this year when you’re still growing but the reality is cost declines are often difficult to achieve on spot growth.

If we look at what your annual ex-fuel CASM declines have been say 2003 through 2007, they’ve been fairly modest when growth was very, very aggressive. Doesn’t this imply that you’re going to be facing some significant ex-fuel CASM pressures in 2009?

Arne Haak

A lot of it will depend on how we adapt to this fleet plan that we’re going through and we do it. But really our view on it is this: we have a great cost position right now and a big cost advantage versus the legacy carriers. Consolidation is likely to widen that. Our costs may come up a little bit because of our slowing growth and going to flat. But really what is going on right now is managing fuel is not going to be done through CASM, it has to be done through RASM. We need to set the level of operations so we can price for energy. If that means CASM comes up and it puts a little bit more that you need to do in front of the fare, that’s fine. The bigger problem here is fuel; it’s not the non-fuel CASM.

Jamie Baker – JP Morgan

Understood, and I don’t want to put figures in your mouth, Arne. But when you say a little bit, that means by my speak something less than 3%?

Arne Haak

Jamie, I think it’s probably too early for us to comment, until we have finalized our decision on how we do this.

Jamie Baker – JP Morgan

Well, it’s always worth a try. Thanks a lot, everyone.

Arne Haak

No problem.

Robert Fornaro

Again, I just want to add one more piece of color. By the time we get to say the September period with two more quarters of reduction, our non-fuel cost advantage versus our nearest competitor, Southwest, will be significant and well below other low-cost carriers and substantially better than legacy carriers.

So again, I think the goal is going to widen substantially by the time we reach the end of the third quarter. At that point we’ll have further commentary about how we’re going to enter the fourth quarter with our capacity plans.

Operator

Our next question comes from Dan McKenzie - Credit Suisse.

Dan McKenzie - Credit Suisse

Just going back to the supply/demand dynamic in your markets, I wondered if you could provide some perspective on the good guys and bad guys from Delta’s change to their schedule.

Arne Haak

I think, certainly, as we enter the summer quarter, I think the situation in Atlanta improves significantly. I think probably the best supply/demand levels are really in the long haul markets which is very good for both carriers. There have been a lot of reductions, again, Atlanta long haul and also in secondary markets which will ultimately help us in places like L.A. and San Francisco.

So the overall situation Atlanta looks quite good and in particular the long-haul markets look extremely good.

Kevin Healy

When you look out through the summer, particularly west of the Mississippi you are into double-digit declines really through most of the rest of the year. So overall capacity is coming out somewhere close to 9% in June, July and August; much larger percentages when you look at what the other guys are doing west of the Mississippi. Generally speaking, I think that puts us in a position to keep moving unit revenue up.

Robert Fornaro

Obviously no one’s forecast beyond September include the reductions that we’re planning, or the reductions that the other carriers are going to make as well. I am just absolutely convinced that two or three months from now if oil prices are at $115 the carriers that announced 5% reductions last week will be announcing more.

AirTran is one of two airlines that have been profitable in the last nine years. We already talked about it today, but our profitability is around $100 a barrel. Most of the legacy capacity was not profitable at $70 a barrel. And so at $100 or $115 the losses are very, very big and they are going to take action. They really have no choice. You can go back and validate those comments with publicly traded information, DOT numbers. I think the stage is set for further capacity reductions in the fourth quarter and beyond.

Dan McKenzie - Credit Suisse

Just following up a little bit more on demand there is, I think, a fair amount of investor concern that at some point here the passenger falls off a cliff and revenues fall off a cliff. Why are we not seeing that already? I would have expected to have begun to see that by now and we’re not. Any perspective on why demand seems to be holding up at this point?

Arne Haak

It’s a question that we ask, we spend a lot of time making sure that we keep demand going. In the near term we still do promotions even though we’ve raised the average fare on sales and introduced other revenue streams to support the current environment.

As you look out past this summer, I think that’s what we’re doing in terms of getting capacity in line with where you think demand might be. The other is certainly for our network I think we have a much stronger network and a product that isn’t entirely leisure-based that will allow us to keep moving forward.

Overall what we focus incessantly on is fuel. It doesn’t seem to be creeping into the rest of the economy, certainly not with the impact that we’re having. But we are aware that that is a potential and that’s why we’re doing what we’re doing with capacity.

Robert Fornaro

I just want to add one comment. Again, I think some of this travel is a little less discretionary than we thought in the past. I think, for example, in some of the marketplaces where we’re strong, over a decade we’ve trained people to travel. Certainly there is that emphasis.

I think if we started to raise prices to ridiculous levels without adjusting capacity then you might see a fall. But you don’t adjust to high oil prices in six months. You don’t adjust from a $70 environment going back to last summer to $115 environment in a matter of months. It does take a little time and it does require multiple actions. It’s continued, modest increases in prices, cost control, and certainly many of these ancillary revenue initiatives as well.

Dan McKenzie - Credit Suisse

In the filings today you mentioned that some of the funds potentially could be used for M&A even though you’re not really looking at any options right now. But evidently the possibility exists. Would you be open to taking a third fleet type? Just given the lay of the land today, I was wondering if you would be willing to provide any perspective on strategic priorities at this point?

Robert Fornaro

I think, certainly if we have, again, an opportunistic mindset we certainly are interested in any asset dispositions that maybe forced out of some of these potential mergers. We certainly want to be poised for that because that will strengthen our company immediately whether we’re growing fast or whether we’re growing slow assets in those very dense key markets are very, very important.

So I think in terms of use of cash on the horizon that’s a possibility. But more importantly, I’d say the focus on cash is to make sure we have the financial flexibility along with the capacity adjustments, our continued focus on costs, our hedging, our monetizing our fleet value. The financial flexibility provides us, again, the time to really focus on being profitable and highly profitable at high energy prices. That’s our number one priority.

Operator

Our next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Clarification, you said that if oil is still up when we go through the next round of calls, that the industry is probably going to be cutting back some more. If oil is still at $117, is the flat next year enough for you, or do you feel like you’ll have to go back a little deeper as well?

Kevin Healy

Bob, I think that really depends on what’s going on in the economy, what do the credit markets look like, what does the fuel market look like? Those are the three things we’re thinking about, and it may be possible that we would have to go even further.

Operator

Our final question comes from Kevin Crissey - UBS.

Kevin Crissey - UBS

Can you talk about the CFO decision and when we might expect that?

Robert Fornaro

Kevin just to make a comment again we have a search going on. . I think some decision in the second quarter is probably likely, but that’s all I really can say about it.

Kevin Crissey - UBS

I think the question was asked in terms of you guys being an aggressor in consolidation. You’ve indicated in your press release that you are not in any discussions. Have you had any discussions and what is your view? How opposed or for the potential for actually selling would you be?

Robert Fornaro

Well, in terms of the consolidation efforts certainly I think we just benefit by having consolidation happening around us. I think if you wanted to focus on hub redundancies, I think we’re pretty well positioned. If you take out a map and just look at the Northwest Delta hubs, or mini hubs and focus cities our operations are very, very close by in the upper Midwest, in Atlanta and in the Northeast.

Despite comments about keeping these hubs in Cincinnati and Memphis, we all know that you can’t make money with 50-seat RJs at very, very high oil prices. So higher oil prices are not consistent with some of the comments that are being made.

Again, regarding our interest in receiving a bid, I think our board is focused on the shareholder and if we received an offer at AirTran we’d take it to the board and we would be very open-minded about it.

Operator

At this time there appear to be no further questions. I’ll turn the floor back to management for closing remarks.

Bob Fornaro

I’d like to thank everybody this morning for being on the call. We felt it was important to move up our call and tell you all what AirTran is doing to recast itself in a world of volatile energy prices.

High oil prices are a challenge for all carriers and they may well abate. However, as we’ve done in the past, we decided to be proactive. AirTran has a history of stepping up to adversity and emerging stronger. We have great strength. We have a unique combination of low cost and high quality. We have a diversified network and we have a strong solid employee culture.

We will take actions in several areas: We will reduce our growth beginning late summer from 10% to no more than flat. We’re going to monetize the value in our 737 fleet, proactively manage our expenses and we’re going to tap the equity and debt markets to provide for additional financial flexibility.

By taking these steps now, we will emerge a stronger airline and be better positioned to take advantage of industry consolidation and a domestic marketplace that will be operated with fewer seats. Thank you for your time this morning.

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